Why You Should Celebrate Retail's Ominous Record

Matthew Carr
by Matthew Carr, Emerging Trends Strategist, The Oxford Club

2017 was a record year. But I’m not talking about any of the records you’re thinking about. For the past few years, I’ve been warning investors about the death of brick-and-mortar retailers.

I’ve written about how malls are either being torn down or are shambling on as zombies. They’re increasingly becoming vacant tombs dedicated to an outdated business model.

The retail sector is in the midst of an upheaval, one larger than any financial crisis could pose.

And you don’t need any more evidence of this than what we saw in 2017.

Last year, retailers shuttered 7,795 stores...

That was a record.

And it blew past the previous high-water mark of 6,163 store closings set in 2008.

To put this in perspective, the number of closures in 2017 was more than it was in 2015 and 2016 combined.

Now, there are failures in that list of store closures - companies that failed to change or were too slow to react. They were victims of their own decisions.

But there are also companies on that list that are well-run, and they’re closing stores as they evolve and adapt to new market conditions. In turn, they’re seeing revenue increase.

For shareholders of Ascena Retail (Nasdaq: ASNA), GameStop (NYSE: GME), hhgregg (OTC: HGGGQ) and Sears Holdings (Nasdaq: SHLD), the pain from store closings was real...

I can’t remember a time when a new year’s market prediction didn’t include that the year ahead would be the last for Sears, the struggling mall staple. But it keeps hanging in there... barely.

I’ve also spent plenty of time over the last couple of years describing why I believe GameStop is ultimately doomed, heading toward the trash heap to join RadioShack and Blockbuster.

The consumer electronics and home appliance retailer hhgregg went under, announcing last April that it was closing its remaining 220 stores after failing to find a buyer.

Ascena needs an overhaul and rebranding. Clothing retailers Ann Taylor, Catherines, dressbarn and maurices saw holiday sales fall at least 6% each.

Ascena’s only brand to see growth over the holiday shopping season was Justice, its kids fashion line. That’s not a survivable situation.

Store closures for struggling retailers are on repeat over and over... and over again. Revenue falls, stores close, revenue loss accelerates, shares tank.

I believe we don’t spend enough time talking about strong businesses closing stores to make themselves even stronger...

Better. Faster. Stronger.

Not all store closings are apocalyptic.

Some are about trimming the fat and refocusing efforts. Companies are also adapting to the new world order and finding a way to bridge that gap between the physical and digital worlds.

Shares of Children’s Place (Nasdaq: PLCE), Crocs (Nasdaq: CROX), Dollar Tree (Nasdaq: DLTR), Gap (NYSE: GPS) and Guess Inc. (NYSE: GES) and have all risen more than 35% over the past year.

They’re outperforming the markets.

And that’s despite store closings.

The fact is, these well-run businesses are evolving.

Let’s look at Crocs - yeah, those Crocs. Those clogs that so many people think, “Do they really need to make more of them?”

Well, shares of Crocs have risen 85% in the past year.

The company jettisoned underperforming locations, closing 160 stores and selling off assets in non-core markets, including South Africa, Taiwan and the Middle East. Plus, it got rid of low-quality revenue. Relative to 2014, Crocs has reduced its inventory count by 50%.

And Crocs has eliminated overhead while at the same time accelerating its expansion into the digital space.

In turn, you have a leaner, more profitable company focused solely on its strengths.

Shares have soared as gross margins have improved significantly, and Crocs revenue has come in above its top-line guidance in recent quarters.

And even though the store closings are expected to reduce brick-and-mortar revenue by approximately $50 million in 2018, that’ll be offset by digital and wholesale revenue.

It’s a similar story with Guess Inc.

Even though the U.S. market is dragging down its bottom line, its total revenue is increasing. That’s a rarity in the retail sector.

The company closed locations in the U.S. (and Canada) where it couldn’t renegotiate rent. Remember, malls are dying, so why pay a premium on square footage? And another 100 to 120 stores could be on the chopping block this year.

For the first nine months of 2017, the company’s North American revenue fell 13%. But...

It’s opening stores in Europe, where revenue is growing 19%.

Children’s Place has a twofold opportunity here. First, it’s benefiting from the Gymboree closures. The two companies targeted the same markets and were co-located in many areas. So when Gymboree liquidated, revenue shifted to Children’s Place.

At the same time, the company plans to close 144 locations by 2020. It’s a trim-the-fat move that’s fueling its evolution.

Last year was a record for retailers - the number of store closings hit an all-time high. But as I’ve argued before, this isn’t necessarily a bad thing. Part of it was getting rid of bad businesses. The most important part, though, is that it’s forced good businesses to focus on their strengths. That’s a reward for both consumers and investors.

Good investing,


Another Lean and Mean Retailer Worth Buying

As Matthew said above, the retail contraction of the past few years has separated the wheat from the chaff.

Some retailers have been hit hard, and some have gone under... but this has left lean and innovative retailers in a stronger position than they were in before.

Etsy (Nasdaq: ETSY), the e-commerce marketplace for crafts and unique or personalized items, is a perfect example. And it's one of Matthew's recommendations in his VIPER Alert service.

Here's Matthew introducing the pick back in December...

Etsy is the online global marketplace for unique items. It's like the world's crafts festival brought into your home.

And as we enter the holiday season, Etsy starts seeing its revenue pick up.

Sure, you can get a professional-grade kitchen knife block set from Amazon. But if you want hand-crafted goods or the face of your favorite relative on votive candles, Etsy is the place to go.

That means the company not only participates in Black Friday and Cyber Monday sales, but also participates in Small Business Saturday with its pop-up marketplaces.

Now, there's been a lot of pressure on Etsy shares since it first launched in 2015. There are several established players in the realm, and the company needed to prove that it wasn't going to take a real laid-back approach to running its business.

Revenue growth can be easy to come by in e-commerce. It's profits that are often much more difficult to attain.

And if you bought shares of Etsy at its IPO, you're in the hole a substantial amount at this point.

But the company is just starting to turn a corner.

It recently reported record EBITDA (earnings before interest, taxes, depreciation and amortization). And even better, it just started to turn a profit.

These are positives with continued strong revenue growth.

In the third quarter, Etsy reported that revenue increased 21.5% to $106.4 million. Seller services revenue grew even faster, increasing 30.6% and totaling $63.4 million.

But like many other e-commerce retailers, the most impressive area for Etsy is mobile. In the third quarter, mobile visits grew faster than desktop visits - a trend that's been gaining momentum over the past several quarters.

And mobile now accounts for 47% of overall visits to Etsy's site. This is the area to watch with Etsy - with it becoming more commonplace on smartphones - that can translate into greater success.

- Samuel Taube with Matthew Carr

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